艾默生電氣 (EMR) 2020 Q2 法說會逐字稿

Welcome to the call. I'd like to turn the call over to Pete Lilly, Investor Relations. Please go ahead.

Good morning, and thank you and welcome everyone to Emerson's Second Quarter 2020 Earnings Conference Call. I hope everyone is staying safe and healthy.

Today, I am joined by David Farr, Chairman and Chief Executive Officer; Frank Dellaquila, Senior Executive Vice President and Chief Financial Officer; Mike Train, Emerson President; Lal Karsanbhai,

Executive President of Automation Solutions; Bob Sharp; Executive President of Commercial & Residential Solutions. And we're also joined by a special guest, President of Professional Tools business in Europe; Mr. Tim Reeves, who is unfortunately still stuck in the United States.

And before we begin, I'll turn it over to Mr. David Farr for some opening remarks.

Thank you very much, Pete. And I want to welcome everyone here. For your information, we are sitting in my conference room, properly spread out. And we have been operating. Emerson's been open throughout this whole process. We made the decision as OCE on March 10, when I came back from a conference in New York. When I was presenting at JPMorgan, I was the only CEO who showed up, and so I made the decision with the OCE to stay open. We have the OCE here every day. We're properly spread out, as you guys know, in this office complex.

We also have about 15 other executives throughout the floor. We get together on an ongoing basis to make sure we're making decisions, constantly making decisions. We shut the rest of salaried workforce down and sent them home, they're working from home. But it was -- I felt it was very important with this crisis that we were here live and we can make quick decisions and deal with the issues very, very quickly, both from a structural standpoint but also from a competitive standpoint, to look at opportunities to keep winning as a company.

The opening slide I want to share with you. Honeywell has been involved with making masks. They have a plant running up in Rhode Island. They have a new plant coming up in Arizona. We work very closely with Honeywell. Darius and I actually talked several times on this issue to make sure they got equipment. We reallocated. Branson makes welding equipment that makes the masks around the world and testing equipment. And so this is currently the facility in Rhode Island we took a picture of, with our equipment and the Honeywell mask.

And we've -- this is where CEOs around the world, what I call frenemies, work very closely together to get things done for the nation, for the world. And I just want to make comments to that because this is a situation where Honeywell and I are working together to do something right for America and not necessarily beating up on something else.

So I want to turn it back over to Pete. But again, here, we're sitting here, we're properly spread out. Tim is holding my Rally Monkey and my Stan Musial bat and making sure that it doesn't get coronavirus.

So with that, Pete, it's all yours.

Thank you, Dave. As usual, I encourage everyone to please follow along the slide presentation, which is available on our website.

Moving to Slide 4 with the results of the quarter. Underlying sales growth was well below expectations, down 7% driven by the dramatic drop in global demand as the COVID-19 pandemic quickly spread in March. Trailing 3-month orders were down 3%, also reflective of the decaying demand environment but indicating some modest backlog buildup. GAAP earnings per share were flat, and adjusted earnings per share were up 7% to $0.89 driven primarily by lower stock compensation costs due to a lower stock price and aggressive restructuring actions started in Q3 of last year starting to take effect.

Despite lower sales, both platforms executed well on profitability, exceeding their adjusted EBIT and adjusted EBITDA peak margin plans for the quarter due to previously initiated and ongoing restructuring actions. Automation Solutions' underlying sales were down 8%, and trailing 3-month orders were down 1%, also well below initial expectations due to the pandemic demand environment taking shape in March. Commercial & Residential Solutions' underlying sales and orders were both down 5%.

Cash flow performance was solid in the quarter with operating cash flow of $588 million and free cash flow of $477 million, up 10% and 15%, respectively. The business returned over $1.1 billion to shareholders, including over $800 million in share repurchases and over $300 million in dividends. Lastly, the company continued to -- continued and built upon its aggressive cost reset plan, initiating $40 million of restructuring actions in the quarter.

Turning to Slide 5. We'll cover the P&L. Second quarter gross margin was flat at 42.1% as favorable price-cost and cost-containment actions offset the declining revenues. SG&A as a percent of sales decreased 130 basis points, reflective of the drop in stock compensation costs due to a lower share price. Adjusted EBIT and adjusted EBITDA margins, which exclude restructuring and related costs, increased 240 basis points and 300 basis points, respectively. These improvements primarily reflected lower stock compensation cost combined with aggressive cost-containment actions taking effect. Overall, the company continued to execute on peak margin plans which were laid out at our February investor conference, in addition to responding quickly with additional actions as sales deteriorated in March and the economic outlook for the remainder of the year became increasingly challenging.

Now turning to Slide 6. Geographically, we saw broad-based weakness unfold in the quarter, but particularly in China and the U.S., down 8% and over 20%, respectively. Europe, which finished down 2%, showed strength early in the quarter which was quickly thwarted in March as the virus rapidly spread and most countries closed their borders.

Please turn to Slide 7. Total segment adjusted EBIT margin increased 50 basis points to 17.6%, reflecting the aggressive cost-control measures and strong operational execution as sales declined. Stock compensation cost decreased $97 million as the stock price moved dramatically lower in the quarter. Q2 cash flow performance was solid. Operating cash flow increased by 10% to $588 million, and free cash flow increased by 15% to $477 million, representing 91% conversion. Trade working capital ended higher as a percentage of sales as ending inventory increased due to the sharp drop in demand in March.

Turning to Slide 8. We will bridge second quarter EPS. Working from our 2019 adjusted EPS of $0.83, you see that nonoperating tailwinds totaled $0.14, led by lower stock compensation due to a lower share price. Operations declined $0.10, reflective of the volume declines due to COVID-19, while share repurchases and lower interest cost delivered $0.02. Adjusted EPS finished at $0.89. In summary, nonoperating tailwinds were largely offset by the effect of COVID-19 on operations. Importantly, total segment adjusted EBIT increased by 50 basis points, and total segment adjusted EBITDA increased by 120 basis points, reflecting just 9% deleverage on $400 million of lower sales versus prior year.

Now we will review the business platforms. Turning to Slide 10. Automation Solutions' underlying sales finished down 8% for the quarter as sharp declines in oil and gas more than offset some growth in life sciences and food and beverage. The U.S. dropped 12% while China was down sharply over 20%. Trailing 3-month underlying orders were down 1%, driven by the early quarter relative strength of the longer-cycle businesses, Final Control and Systems, which grew 3% and 7%, respectively. Of note, backlog grew by 3% to nearly $5.1 billion on a sequential basis compared to the last quarter.

The platform delivered strong profitability in a very challenging demand environment. Adjusted EBIT and adjusted EBITDA margins were up 50 basis points and 130 basis points, respectively, reflecting aggressive cost actions taking effect. Restructuring actions totaled $29 million across the platform, which brought the total to $112 million for the first half of the year.

Turning to Slide 11. Commercial & Residential Solutions' underlying sales were down 5%, also reflective of the deteriorating demand environment with COVID-19. North America dropped low single digits while Europe dropped 1% as modest momentum in the heat pump business was more than offset by declines in the Tool business. Asia, Middle East and Africa were down 15%, driven by China, which was down sharply over 30%. Trailing 3-month underlying orders were down 5% as each of the HVAC, Cold Chain and Tools businesses were down mid-single digits. Asia orders dropped 14%, driven by China, which dropped over 25%.

Commercial & Residential Solutions also delivered strong profitability with adjusted EBIT and adjusted EBITDA up 40 basis points and 90 basis points, respectively. This outcome was driven primarily by aggressive cost control, cost actions and favorable price-cost dynamics. For the quarter, restructuring actions totaled $9 million, which brought the total figure to $19 million for the first half.

Turning to Slide 13. We will review the updated guidance. The speed and breadth of the impact of the COVID-19 outbreak has been truly unprecedented. As such, we see a very challenging demand environment, certainly for the remainder of the fiscal year and into the first half of next year. Additionally, we assume that oil prices will stabilize in the $20 to $30 range per barrel. Later in the call, management will elaborate on our outlook in detail, but here is the summary.

Based on conversations with customers, government officials, internal analysis and comparison to previous downturns, we now expect underlying sales to be down 9% to 7% and net sales to be down 11% to 9% for the year. Due to the deteriorating demand environment, we have increased restructuring spend to be approximately $280 million, with approximately $230 million come from -- coming from the Automation Solutions platform and $45 million coming from the Commercial & Residential Solutions platform.

We now expect adjusted EPS in the range of $3 to $3.20, a reduction of approximately 16% at the midpoint. We expect operating cash flow to come in at approximately $2.75 billion, and CapEx spending expectations have been decreased by $100 million to $550 million, resulting in a free cash flow target of approximately $2.2 billion. Lastly, our share repurchase program for the year is now complete at approximately $950 million.

Please turn to Slide 14, which bridges our updated 2020 adjusted EPS guidance. The starting point for the bridge is 2019 GAAP EPS of $3.71. Walking across, we have 2019 adjusted EPS of $3.69, which excludes $0.14 of favorable discrete tax items and adds back $0.12 of restructuring. Now walking across from $3.69, we expect a total of $0.11 of headwinds this year for FX, stock comp and pension. Operational headwinds have dramatically increased. We have reduced our full year sales plan by approximately $1.8 billion from prior year, resulting in a $0.50 -- $0.57 headwind. We expect $0.09 of EPS from interest and share repurchase tailwinds. This gets us to a full year adjusted EPS midpoint of $3.10.

Of note, since the major portfolio transformation of 2015 to 2016, Emerson has averaged 42% to 43% of full year estimate EPS by the end of the first half. This year, our first half adjusted EPS totals $1.56, which is approximately 50% of the full year EPS guidance, well ahead of normal pace.

Please turn to Slide 15, which lays out our third quarter 2020 guidance. The underlying sales outlook for the quarter is dramatically negative, reflecting near-term challenges and an elongated recovery in industrial markets from the COVID-19 lockdown, combined with low oil prices and associated spending reductions. Underlying sales is expected to be down 16% to 13%. We expect adjusted EPS of $0.60, plus or minus $0.04, which excludes roughly $100 million of planned restructuring actions in the quarter. We see total segment adjusted EBIT in the 15% to 15.5% range and adjusted EBITDA in the 20% to 20.5% range, reflective of aggressive cost control measures somewhat offsetting the reduction in volume.

And now please turn to Slide 17. I will hand the call over to Mr. Frank Dellaquila and Mr. Mike Train to discuss liquidity and operations.

Good morning, everybody. We wanted to spend just a few minutes here on liquidity to dispel any concerns anyone has. We're in really good shape, we believe. We never take this for granted. We're never complacent, but we believe we're in very, very strong position as we enter the downturn here. We have the capacity to fund all of our internal needs and our dividend despite the fact that we, as you just saw, expect reduced operating cash flow over the next several quarters. We have a modest amount of leverage even in the downturn. It will be less than 2x debt-to-EBITDA at year-end on this plan. 65% of our total debt is term debt. And as a result, we have very good liquidity in our capital structure.

I'm looking here at Slide 17, just walking down those points. At March 31, we had $2.6 billion in cash. More than half of that is available on a same-day, or at most, next-day notice. So we're in very, very good shape if there should be a market disruption. And we also have a $3.5 billion revolver which is not drawn, and it's committed through April of 2023. We also have the right to extend it under the current terms and there are no financial covenants in the revolver. So all in all, as we look at our ability to fund our needs short term and longer term, we feel like we're in very good shape.

If you please turn to Slide 18. When we begin to -- when we began to see this coming in mid-February, we started to extend maturities in the CP program. At first, that was difficult because the market was somewhat roiled. It improved when the Fed stepped in and announced a couple of programs to indirectly and directly support the commercial paper market. And as a result, over the last 1.5 months, we've been able to extend the CP maturities from about 20 days out to 45 days. And including that -- included in that, we built a $1 billion cash buffer here in the United States, which we will revisit as we go through time here. And if we get comfortable that things are improving, we'll start to work that down. But for now, we think it's prudent to have that on the balance sheet just in case that there should be a downward turn in market conditions.

We're also evaluating the issuance of term debt. Credit spreads gapped out pretty significantly at the beginning of the -- of this crisis. They've come in quite a bit since then and all-in cost for term debt for investment-grade companies are pretty attractive. So we are obviously looking at that now with a view toward injecting more liquidity into the capital structure. So you can see there on Chart 18, how the maturity profile of the CP plays out.

And then finally, on Chart 19, we've always maintained a very conservative debt ladder, always been very conscious of spreading out maturities. So you can see that we have a lot of places there where, if we choose to issue term debt over the next month or so here, we can do that in size and still have a very conservative debt ladder as we hit the open spots between the towers that we have there.

So again, in sum, I think we're in very, very good shape regarding liquidity. We're going to watch it very closely, but we feel pretty good about our ability to do everything we need to do as we go through this downturn.

Thank you. I asked Frank to talk to the shareholders this morning about this issue. Frank and his team, I have to give tremendous kudos to accomplishing what they've done. They came to us in early February, long -- and basically saying we need to start taking action. Frank also worked very closely with the Finance Committee, the Chairman and several other members of the Finance Committee who are very knowledgeable of what's going on in the marketplace, and they structured this very well at the time.

We also had several executives -- we had an Executive Board meeting to discuss this issue and other actions. And then we -- also, last week, we pulled up our Board meeting and had a 4-hour Board meeting with the Board. And then yesterday, we had the Audit Committee meeting. So we're trying to communicate to our Board to get their inputs. But most importantly, as I look at this, liquidity, the financial structure, the ability to finance this company in the times like this are very, very crucial. And Frank and his team have done an outstanding job with that.

Before Mike has a comment about the battles he's been fighting around the world, I want to remind people on part -- Chart 20 for the new sell-side or investors out there. Emerson's had a very global regional strategy since back -- since the day I started running the company as the CEO back in 2000. We've had this strategy where we look at the world on Americas, Europe and Asia Pacific. We go from manufacturing, engineering, supply chain, customer sales and support service. And we look at ways -- I call it the tic-tac-toe chart. We look at ways that we could serve the global marketplaces out of 1 or 2 and maybe even 3 of the regional areas. This has been one of our strategies from day 1.

I also want to thank the Audit Committee and the work that some -- our Head of Audit, Lisa Flavin, who runs audit for us here inside, worked on our enterprise risk strategy which analyzes this chart and making sure that it works. And it has worked as we've gone through this strategy. We first tested it clearly in February and early March with the China shutdown. And we've tested it again.

Now we -- there are issues we will deal with when we get out of this. But from my perspective, this whole regional strategy, one you hear now, even the President of the United States talk about, is something that's been very effective for this company relative to serving our customers. And I want to make sure people remember that we have this. We will fine-tune this a little bit when we come out of this because I see some different issues in today's world. But this is a living document that we've obviously adjusted over the years, including when we had too much concentration in China. About 8 years ago, and many of you know that I started making moves with the team to move some production out of China and diversify it more around the world. But again, I want to thank Frank and the work of the Finance Committee and then also want to thank the global operations. And I'll have more comments on this in a second.

Before I turn it over to Mike, when we got the OCE together in early March, we formed many, many task force led by the OCE. It wasn't that one throat to choke here. We had everyone involved. And one of the things that Mike stood up to do is dealing with the international markets, the international governments and making sure that we can keep our facilities open, both from a manufacturing standpoint and a sales and -- sales, operations and supply chain. And Mike has extremely broad and deep knowledge of the international markets. He's been working for pretty much his whole life here at Emerson. And so Mike has been leading this battle with the operating leaders at the same time, taking care of this battle.

So Mike, I'm turning it over to you. And update the shareholders on how we see it right now.

Yes, David, thank you. A pleasure to be with you here today. Just on that Chart 20, before we leave that, I think Emerson's critical nature of the work we do and being able to be responsive and resilient in each of these regions is really, really important.

So let's go to Chart 21. If you recall last time we were together was our Investor Meeting on February 13. Our China operations were just getting restarted after a government mandate to be closed for 2 weeks. Early days were a bit rugged as suppliers took some time to get cleared to restart, and there was quite a challenge on intra-province and international logistics. This has significantly improved in the past month as we've seen our China business starting to come back in a stronger way. And I know Lal and Bob will provide some insights on that in a moment.

As the coronavirus began to make its way around the world, we saw challenges to our operational capability imposed by governments as they implemented various forms of stay home, shelter in place and lockdown orders. Emerson provides critical infrastructure products and essential services. And with great effort, we've been able to gain government recognition and designation.

China led to the South Korea and Italy impacts, which then moved along to France and Russia, Middle East and the Americas. It's been a highly dynamic environment, and I must give our global Emerson team, who are likely listening into today's call, a big thank you for their collective efforts in working with customers, suppliers and governments to keep these critical industries running, running when it's needed most.

In the last weeks of March and early April, we saw a multitude of states in the U.S. and multiple countries around the world implement these orders. We saw tens of thousands of our own employees leap into a work-from-home mode. And it's been amazing to watch the Emerson team deal with a sudden new reality and come through in every aspect. Not great timing from the end of a quarter perspective, but our plants on balance stayed up and running and we did our best to deliver to customers.

As we sit here today, we're still working some major issues. The India lockdown, which was recently extended to May 3, has proven exceptionally challenging as logistics and the ability to operate were shut down practically overnight. And we've worked now to get all of our plants designated critical and up and running to some extent. Things are now moving in the right direction, but we have several weeks to go before we really get back to a solid place. We have worked closely with the government officials there, and I appreciate their engagement.

In Europe, we went through some rough times in Italy, but things are much improved now. We're still working through some supplier issues and community sentiment in Europe. But again, directionally, things are going the right way.

In the Americas, U.S.A. has been incredibly interesting to navigate. I need to highlight the guidance that the Department of Homeland Security issued on critical infrastructure and essential services. And with a few exceptions, our states and cities have aligned on this guidance.

Right now, I'm spending my time on Mexico, where there is still significant efforts to manage the virus. And I'm working to get alignment on critical infrastructure guidance, both within Mexico and in concert with the U.S. and Canada.

David, a lot of detail here for investors, but hopefully, this gives them a good snapshot of how the world's dealing with the virus and climbing its way back. I know we have some China conversation coming up, which may be important in thinking through how things play out over the next few quarters.

Again, to my Emerson colleagues, thanks for the tremendous effort and collaboration, really important as we keep food, medicines, energy, electricity, medical goods, everything else we touch, flowing to our communities.

Well, Mike, I want to thank you very much for this issue. This is not easy. This is 24 hours a day, 7 days a week, day in and day out. Over the weekend, you and I were talking a lot. You were talking to various people, dealing with political leaders at all levels to make sure they understand the importance of this and then working very closely with -- hands-in-hands with operations.

I also want to make a call out to Steve Pelch and the organization relative to the work they've done on safety and all the task force that we've rolled out with help of Bob and Lal and the other team around the world, knowing what's going on. Every day, we get reports around the world of what's happening with employees, if any of them have contracted a coronavirus, anyone has become -- tested positive, who's being isolated. Steve has organized this right now. He is now in the process, working with the HR teams and the global manufacturing teams, to get to how do we come back out of this on a measured way, in a safe way? How do we come back out of this operation and get everyone back to work and back into the buildings that we have from a salary standpoint and support our global manufacturing and technology?

But Mike, in this area here, this is something that we've never had to realize before where we've had to work governments at the highest level. This is where having those relationships that all of us have, and everybody at this level, and also retired executives at Emerson have, that really come home and help us in times like this.

But for the people out there, before I go into it, I want to make other comments. As you can imagine, we are fighting a global pandemic war. And given the CEO that runs this company, you guys know me pretty well, I firmly believe that leaders need to be at the front. We don't need to be hiding in bunkers or hiding at home. Leaders need to be at the front and fighting the war and winning this war. And I want to make sure that special recognition goes to the Board, who's been working with us very closely with special meetings; the OCE; the senior executives; and all the world area people that have been engaged and are working this -- on the daily issues.

It's amazing what comes up on a daily basis, but being together allows us to walk down the hall, properly stay apart from each other, other than every once in a while, maybe screaming at somebody. So they're a little too close. But it's important that we have this eyeball-to-eyeball contact to deal with the issues. But again, the Board accelerated a Board meeting, they accelerated the review of the numbers, and the Audit Committee approved the numbers yesterday. And we will be filing our Q hopefully by Friday, at the latest on Monday.

Also, very important to all the employees around the world and customers is communications. And every one of us, myself and Bob and Lal and Steve and Mike, we've all had videos. I'm doing another set of videos today, as is Bob, I believe. We've had notes, we've had letters, and we've communicated constantly to our employees so they know what's going on. It's important that they're not too worried about this because we are clearly in a war and we've got to keep fighting this.

So from my perspective also, I want to make one other comment. You'll see on the slide here. In a conversation I had with the Executive Board a couple of weeks ago, we made the decision at the OCE level that we -- at the Board level, the OCE, we took a 15% base salary cut effective April 1, which is now in place. We went to the next senior level, executive levels, pretty high level all the way out, down to 10% (sic) [down 10%]. And then the rest of the global people involved on our bonus programs are -- took a cut of 5%.

But you're going to see cutbacks, you're going to see furloughs. There's a lot of things that are going to be happening here. We've pushed out all salary increases for 12 months. So it's a rolling process that people like me, who would normally get my salary increase in November time period, that will not happen in November of 2020. I won't get one until 2021, which most likely means I'll get nothing because I will be retiring. So be it.

On Chart 23, I want to give you a sense of the orders. Now keep in mind -- I know people are wondering, how did Emerson only have negative 3% in the quarter? Well, the real impact started in the last 2.5 weeks in March. We as a company talked to you all in February at the meeting in New York, around $100 million, and then we raised it a couple of weeks later to about $150 million. Then what happened as the world started engaging, we saw the impact in the second half of March. So overall, we are only down 3%, Automation Solutions only down 1%. But if you look at Bob's 5%, he basically is in line. He's a book and ship company. He was pretty well in line with his orders and sales for the quarter.

So what this chart shows you, though, is clearly what we see now is a pretty strong drop-off in the months of April, May and June and July. And you're going to see orders that are now going to start bouncing in the negative 10%, negative 20%. And I know Lal and Bob will give you some color on this, but that's what we'll be facing right now. Because historically, you would see that negative 3% and say, "Oh, Emerson will be okay in the third quarter." That's not the case. It started dropping. But that -- so I want to give you an understanding of why the orders held up. We're doing well from the standpoint of what's going on in the economy, but it's still going to start dropping down. And hence, the very weak third quarter that Pete outlined with you earlier.

As you look at the underlying sales growth, as the OCE and we held WebExes around the world with all our key leaders around the world over the last several weeks, in fact, the last 45 days, as we lived together here, we now see a pretty strong downturn here in the third quarter and also in the fourth quarter. We see this as a 4- to 6-quarter reduction. This is on Chart 24. And at that point in time, we're structuring our costs accordingly. This is not going to be a quick bang up, bang down, bang up. No, it's not. It's going to take time.

Now if you look at the '21 numbers, those are directional only. We think that we're going to have the first half, will be negative and then it'll start turning back up. The question will be how fast the governments open up certain parts of the world, how fast the government stimulus comes into play, how fast do some of our customers come into play.

We are now modeling what we think is going to be the '21, '22, '23, for both our internal standpoint as we see more and more inputs every day coming in from the customers, every day coming in from around the world. As you look at this, we're looking at a pretty strong negative third quarter, down 14% online growth, plus or minus probably 2 points. Third quarter, which we'll talk about, Lal will talk further about, minus 10%, plus or minus 3 points. So -- and then you see some negative growth as we move into the first half of next year.

So we're hunkering down into a very, very challenging 2020 and a challenging first half of '21. And hence, the work that the operations and also corporate's done relative to cost. And as I look at what's going on right now and we're in this pandemic war, we basically look at the situations of what -- we're evaluating everything. What we really need, what -- or I'm evaluating the organization, which ones are rising to these challenges, which ones have the right stuff and which ones are bunkering.

And so all these things are very, very important to me as we go in and spend our time every day here in the office. And since there's no golf going on, I basically spent 10 hours a day at the office and I go home and walk for about at 1.5 hours every night with my wife and then I start thinking about things and I get back to the office. So a lot of time in Emerson right now as I think through with this team, most of the team and talk about what's happening.

If you look at the aggressive cost actions that we started last year, and that's what's really helped us. As you saw the close both at Lal's Business and Bob's business, if you think about what we did versus our guidance, our sales dropped in the second quarter $340 million, the deleverage is only 15%. That's tremendous. And you'll see Bob and Lal will give you a little bit more detail on that.

Versus last year, if I look at -- from the second quarter standpoint, we dropped $408 million and we only deleveraged 9%. And that was fundamentally because of the work that Bob did last year early on, and then also the work that Lal did in the second half of calendar year 2019. So that really paid off.

Cash flow. The guys around the world did a great job, but now earnings are dropping and we're looking at a much tougher cash flow in the second half. We still will generate strong cash flow, but not at the same level because earnings are dropping.

We clearly, right now, as you look at the analysis on our cash flow in the first half, we are now starting to liquidate our balance sheet, which is not unusual for Emerson. We're very, very good at managing our cash flow. Hence, we generate strong cash flow in the first half of the year. But as we liquidate the balance sheet in the second half of the year, the toughest of it will be inventory because inventory -- the volume has dropped dramatically right now. And then what will happen to us as we go into '21, we'll start and have to add the balance sheet as we start growing the company again sometime in late '21.

Restructuring has truly helped us. Both at the corporate level, I talked to you about the cutbacks we're taking across the world on salaries, on cutbacks and delays in salary increases; but also our bonuses will be -- was significantly reduced. We are not going to 0 bonus. We've cut them back significantly. We'll be setting targets around margins and cash. And this is very important right now as we go through this positioning, how to protect and maintain those margins and how to generate cash. And that's something that we're working on right now as a corporation, and I'll work with the full comp committee and the full Board.

We're also accelerating restructuring. We had a major restructuring program underway already. In 2020, we were going to spend $215 million. It's now up to $280 million. Both businesses are using this opportunity to really evaluate, okay, how do we set the cost structure even stronger for us going forward, looking at layers, looking at organizations? And what do we really need to do relative to the organization to make sure we win but also have the right cost structure and so we go through this tough time period?

We don't know exactly how things are going to go, but we have a good sense. I mean this team has been around a long time. As you know, I've been at Emerson for 40 years. If I went around this room and asked how many years these senior executives in this room have been, these guys are well into the 20s, into the 30s. So they know -- we know what's going on. We have very strong indications on what we've seen before and what we see today. So we're really looking at keeping the costs in line and making sure we stay aggressive.

One of the things we've done over the years, as you well know, is we've continued to diversify the company. Today, 80% of our -- we have non-oil and gas end markets. So oil and gas markets, clearly, upstream oil and gas, the pipelines and terminals. Even pipelines and terminals right now, it's a questionable market. Some of the terminals are actually growing. They're investing in terminals because they're storing oil. But typically, we're down to basically 20%, driven by this oil, gas fluctuation. Our rest of the business, we've continued to diversify on. And both Lal and Bob will talk a little bit about this, but we clearly have a different mix today, and you'll see it here in a few minutes. And Bob has a very broad diversification around some key industries. And so it makes it a little bit different than we've had in the past.

Yes, we're going to get hurt by oil and gas investments when 20% of the company is around that upstream oil and gas, but you're also going to quickly see that we have a very strong KOB 3 business here in this marketplace. So the market is not going to 0. We are going to support these organizations, and you'll see the numbers, they're quite significant investments we've made over the last 10 years in our service organization and penetration in the aftermarket, and Lal will talk about that.

One of the other things is, clearly, North America. In North America, we obviously do very well. We have a very strong position in oil and gas. However, we also continue to diversify ourself against -- away from this marketplace, and still support it. We're not walking away from it, we just have other businesses that -- and from the standpoint of pharmaceutical, medical, chemical, whatever industries. Power. So if you look at where we see today, you think about percentage of automation sales, this year, we're going to be in 10% to 12% in oil and gas in North America. It's not going to go away. It's not going to go to 0. You can see last year, it was $900 million upstream. This year, we're looking around $750 million. I guarantee you, the majority of that will be KOB 3 aftermarket business to keep the facilities safe and running and producing.

If you look back at the last industrial recession, we're well over $1 billion. It dropped a little bit upstream, but it didn't go away. We don't have the numbers relative to the '08, '09 numbers, but you can see that it was a little bit higher percentage at that point in time.

So we have continued to diversify. We have continued to work on our aftermarket business. And what I really want to do for the guys, and I'll turn it over to Lal in a second, but I wanted to give -- them to give you an insight relative to the business you see right now, also to give you some really strong insights that you're not going to get from a lot of other people around China, actually giving you numbers, showing the shape of the curves and the recovery. But we've done a lot of work here thinking about what our investors would like to know about what's going on inside Emerson and what we see day to day, which clearly is fluid, but we as a team are working very quickly to react to this.

And so Lal, why don't you take them through this, your presentation here?

Yes, sir. Thank you, David, and good morning. I'd like to begin by acknowledging the global Automation Solutions team for a tremendous close to Q2, particularly as we faced rapidly deteriorating market conditions. This team has momentum in executing our peak margin plan and is focused on the additional challenges we now face.

So turning to Chart 28. This is how the plan looks from an orders and sales perspective in what is a significant demand-driven cycle. Orders were down 0.8 points in Q2 versus a 2.3% plan and will weaken in trough in Q3 and stay negative for 5 consecutive quarters as we have modeled the next 4 quarters. From a global perspective, these are 2015, 2016 type of numbers. However, in 2015 and '16, it took us essentially 4 quarters to unwind; whereas in this cycle, it really happened in a quarter.

North America is very challenged. I'll give you a little bit of color on the world areas now. North America is very challenged. Obviously, the oil prices and what's happening in the marketplace is unsettling, and it presents a huge challenge to the upstream business. We will see production quotas imposed as the Texas Railroad Commission and others meet and vote later this morning. Rig count is down 35% in Western Texas in the last 30 days, and our RFQs in the upstream business is down about 25%. There are only 35 operating rigs left in Alberta, and we believe production will be curtailed by at least 20% in North America. Downstream, refiners are curtailing production as well. Some are shutting down units and other smaller refiners are shutting down completely.

This is partially offset by strength in medical and life sciences, as Pete pointed out. We won a major biopharm job, which we will book in May. And we have a 100-person team assigned operating at about 2,000 hours a week to deliver an FDA-approved, validated system in September. That is record time for -- to stand up a pharma plant.

Let me turn to Asia. The good news is China's recovery is better than expected. We will beat order -- the orders plan in April, significantly driven by semiconductor and medical. The near-term demand in China is relatively strong as the economic stimulation takes hold. And I'll show you the specific details on a monthly basis on China.

India is a bigger risk, as Michael pointed out, with significant lockdowns across the country and more restrictive measures instituted today, making it increasingly challenging from a sales-executing perspective. So we got to keep working that. However, across Asia, companies are resilient and anxious to do business, but the restrictions are prohibitive at times on the sales side.

Let me turn to Europe. Europe's had a very good close to Q2. And we have very few cancellations to date. Customers are working the Ts and Cs aggressively. And RFQs in total have dropped about 15%.

Well, I'll give you an example of Southern Europe which is interesting. For us, Southern Europe is Italy, France, Spain and Portugal, arguably the hardest-hit part of the world when it comes to the virus impact. On average, we booked $40 million per month in those 4 countries. We will book $38 million per month in April -- in the month of April. That's less than -- that's down less than 10%. Our Italian plants and suppliers are back online, and goods are flowing as the Port of Genoa is now reopened, albeit very busy.

Turning to the Middle East. Very strong environment continues with strength in Saudi Arabia offset by weaknesses in Iraq and Kuwait. The project funnel continues to move positively with Aramco remaining committed to their jobs. And virtual meetings are taking place across the region, and we have significant digital transformation wins as well.

And lastly, in Latin America, we have seen a significant impact, particularly in Mexico. The Chile copper mining and Peru gold mining continue to be bright spots in Brazil outside of Petrobras, particularly at MODEC, continues to be a good story for us.

Turning to sales. The plan for Q2 was a positive 0.5, we were down 8% as we pointed out. Again, we will trough to 12% in Q3, and we'll stay negative as planned here for 5 consecutive quarters.

At this point, it's important for me to highlight our backlog position. In the first half of 2020, we built $600 million of backlog, predominantly across our Final Control, Systems and Measurement solutions businesses. The assumption in this plan is that we reduced backlog by $300 million in the second half of the year. That results in Q4 being down in the 8% range and 2020 being down in that 7% midpoint range. If we can only convert 1/3 of that backlog assumption, meaning about $100 million, Q4 will be down 12%, and 2020 sales will be down approximately 8%. That's the sensitivity on the sales plan.

Let's turn to Chart 29. The last portion of this chart is an exact replica of the chart I shared with you during our February investor conference. The 2023 peak margin plan as defined had $325 million of restructuring spend impacting 2,300 salaried headcount and 110 facility reductions, yielding approximately $400 million in savings.

Focusing on 2020 specifically. We committed to spend $177 million of restructuring. In the first half, we spent $112 million, including $83 million, which we spent in Q1. And that was prior to our February meeting in New York. The team has identified an additional $53 million of restructuring, bringing the total for 2020 to $230 million and driving annualized savings of $314 million. This means that we have to execute $118 million of actions in the second half, $85 million in Q3. This incremental plan impacts an additional 1,100 individuals and results in $40 million of savings in the year. An additional $40 million of savings are generated by pullback of discretionary spending and other cost actions. In 2020 alone, we will impact over 8% of our salaried workforce.

Let's turn to Chart 30. One of the most fundamental differences in our business today versus prior cycles is our KOB 3 position. We have essentially professionalized our MRO strategy since 2011, when we had a significant focus to this program and have subsequently expanded KOB 3 as a percent of total sales by 20 points. Through March of 2020, KOB 3 makes up 60% of our global business, up 3 points from the 2019 historical high.

The $120 billion installed base of our technology around the world has created tremendous trust and credibility with the customer base. We are not relying on large orders through this challenging cycle, but we are significantly more dependent on day-to-day small orders that have become an increasingly important element to our business. Nowhere is this more relevant than in North America, where KOB 3 now represents 67% of our sales.

Let's turn to Chart 31, please. Most of the industry's focus has been on the dramatic cuts from the shale operators in North America. And while we drive a large percentage of our oil and gas sales from North America, 44% as indicated on the chart, our exposure to the shale segment specifically of customers has only represented approximately 20% of total oil and gas sales.

While we do see capital spending coming down in all geographies, we continue to win and execute critical projects around the world. The oil logistics challenge is creating opportunities across the globe for terminals -- terminal projects, both modernizations and greenfield developments and several -- it's funded new jobs in Mexico, in Abu Dhabi and in China. Additionally, upstream projects are still moving forward with limited new awards in international markets. And projects in execution are progressing, leveraging digital tools for remote collaboration for engineering and acceptance tests.

So what does this mean for Emerson? One, our strong global team of sales and service continue to engage with our customer base, in some cases, in person, but also using the digital tools I described. Two, Emerson's digital transformation business is a competitive advantage for us. We have well-developed connected solutions that enable customers to take people out of the process. Three, we are actively working with customers to reschedule shutdown and turnaround activity into the fall season. Four, we have increased engagement with customers using our remote educational services. And lastly, we have developed targeted competitive displacement programs as many of our peers have extended product lead times 8 to 10 weeks or longer as they lack the regional manufacturing footprint capability.

Turning to Page 32. The project funnel currently sits at $7 billion versus the $7.1 billion we communicated in February. The oil price shock has triggered projects to be deferred into 2021 or 2022. Approximately $900 million of jobs have shifted to 2021. That is 2x the pace of FID pushouts that we have seen to date. Cancellations are -- predominantly occurred in North America. And to help you bridge between the February meeting and what we see today as a business, we had approximately $135 million that we booked out of the funnel since February, we removed $203 million out of the funnel, $27 million of scope change occurred, and we added approximately $270 million to the funnel.

The major reductions, as I said, were North America, predominantly privately funded LNG jobs. And the predominant additions were MODEC FPSOs, 3 ships; Asia petrochemical jobs, predominantly in China; and BHP job in the Gulf of Mexico. Three large projects remain in the funnel: The Qatar NFE LNG; the Aramco crude to chemicals; and the Ratnagiri Refinery in India, which is a JV between ADNOC, Aramco and Indian oil.

Let's turn to Chart 33. I would like to turn to a segment of our business that have significantly accelerated through this challenging time: Our medical and life science business, which will be close to $550 million in 2020 sales, growing double digit.

In the medical, it's predominantly in our discrete and industrial segment of business. This includes Branson ultrasonic welders that David highlighted at the outset for medical PPE, ASCO medical regulators for applications such as ventilators and oxygen therapy machines, pneumatic controls for lateral-turning mattresses on intensive care beds. The business is projected to be up 40% in 2020 to $188 million.

The life science business is largely in our process business: Systems, Measurement and Final Control, where we have built a significant amount of technology around a leading DCS position in the life science market. This offering involves control as well as hygienic valves and single-use instrumentation.

Our position in the life science business is very strong. It goes back to the foundation of DeltaV as a smaller IO system best fitted for batch applications. Today, we have over 40% participation in what is a $0.5 billion life science DCS market. That's 2x greater than the next-nearest competitor. And we play across the entire industry value chain, from development to production and fill.

Turning to Chart 34. I would like to give you some perspectives of what we've experienced in China over the fiscal year. This chart depicts orders and sales for 2020 by month. The markdowns in China were extended beyond Chinese New Year, but most of our operations resumed by February 10. We always expect that dip to occur in February. As you saw there, it occurred in 2019, obviously more extreme this year. By March, our orders were $125 million, down 9% versus 2019 and are expected to be down 10% in April as well, although I could see us closing that gap.

The acceleration in orders in the second half is driven by oil storage. SINOPEC recently announced the construction of 7 new tank farms as well as petrochemical activity ramping up for the elements like fiber production, a key feedstock for medical PPE. Much of this is visible in the Q4 plan.

Sales in March were down 22% versus '19 despite our capacity being back to 96% by the end of the month. In April, capacity and manpower availability are both at 98%, and sales are expected to be down 2% to flat versus 2019. So a very quick recovery as we get out of March into April. For 2020, right now, I see orders projected to be slightly up, around 1%, and sales to be flat versus 2019.

Now I'll turn it over to Bob Sharp. Thank you.

Thanks, Lal. Like Lal did, I want to start by recognizing the team out there. Q2 ended very differently than what we thought, starting with the China downturn in February coming out of -- delayed coming out of Chinese New Year and then going into March, as we'll talk about. Despite that, we had a very strong quarter. Gross profit drove the 0.9 of adjusted EBITDA improvement. We held SG&A in line with sales, even though, again, that sales dropped by about 5% just in the last weeks. And that was certainly a strong effort.

As essential business, we keep running. Around 84% of the Commercial, Residential Solutions (sic) [Commercial & Residential Solutions] employees are still going to work every day at the site because that's what we need to do to produce and ship our product. And I certainly want to extend a special thanks to that group. And we've taken many measures to make sure they're safe, following the government and local health guidelines as well as doing additional actions as well.

Now for the chart here, what I'm showing, the sales and orders for Commercial, Residential largely go in line with each other. We have very much a book-to-ship business. So what I'm showing here is our sales outlook for this year into next year. And then I'm going to use the financial crisis as a reference because I don't -- there's not really any direct reference to what's happening right now, but the closest thing I think we see is probably the financial crisis.

So you can see it going in, last quarters have been kind of flattish, if you will, down a bit. We expected it to be very similar through the rest of 2020 even a month or 2 ago, and then things started changing pretty quickly. In Q2, China ended up being down 33%. The U.S. still held pretty closely, around 3% down. And you can see now as the COVID effect has carried through into Europe and U.S. and other places, the second half changes significantly.

Again, China was down 33%. We expect China to actually be moderating, if you will, and coming back. I'll show some more specifics on that, and then things are really going to turn. Whereas the U.S. and Europe, in particular, down significantly in the second half. So a bit of a flip-flop. Certainly, the 2 keys for us for the second half are going to be what China does from a trajectory standpoint. And then U.S. summer is always a key variable for us with the heavy air-conditioning presence that we have.

You can see right now, directionally, and it is certainly directionally because we're focused primarily on this period in this quarter more than anything. But going into 2021, if it follows similar downturn to the past, we would expect by the second half to be turning up, and the magnitude of that is certainly to be determined by a lot of things.

At the bottom, again, the 2008 to '10 reference. We had a little more growth going into the financial crisis, up a couple percent being down. You can see we went down 10s and 20 percents in 4 quarters, and then had a pretty sharp snapback in 2010.

There are some differences, I think, in this one. The housing starts in the U.S. went from about 2.5 million down to 0.5 million in 2009. It was very much financial-oriented. This is obviously a very different crisis. Certainly, substantial job loss right now, especially in the U.S., over 22 million jobs. So far, we see that as being probably less housing-oriented kind of positions. But certainly, as that plays out, that could also be a key factor as well. So again, at this point, we're buckling down for a very challenging quarter that we're in. Still continued challenges in Q3, and then we'll watch how things develop, including a lot of the external factors around the COVID virus as far as what's going to dictate for 2021 outlook.

The next chart I'm showing is -- on the left is the exact chart I used in February for the investor meeting. You can see the peak plan summary, about $330 million of total actions, 500 salaried headcount actions on only about 8,000 salaried headcount in this business. That's a substantial percentage, a number of moves, the best cost, a number of factory changes. This is a very GP-oriented plan, so driven heavily by factory activities, automation and other programs. And then certainly, price-cost is always a big factor for us.

On the right, you can see from an update, we beat this plan for H1, again, despite the fact that the second quarter changed significantly in the last weeks. To this plan, we've added 300 additional salaried actions. That's a combination of restructuring and then pulling open jobs and basically every possible move with respect to the workforce. We're very tight right now, and the organizations are managing to that. We are going to be using widespread furloughing in the business. It's an unusual practice for us, if you will, well, probably because we do expect this ideally to be a relatively short-lived thing. Once the virus comes under control, we're trying to manage through by keeping -- getting the cost down quickly in this half. Still have the opportunity with our workforce next year. Of course, if next year changes, we still have other levers to pull, but that's the one we're going after right now.

On top of the restructuring activities, there's also $31 million of other additional cost actions, which is, again, basically all levers we can pull on the SG&A side. Our second half SG&A spend versus our original plan is now down over 10%. So we're working to adjust to the volume decline. And certainly, as Mike mentioned, there's a lot of supplier, internal customer and other disruptions to our operations as we work to keep running, work to keep our customers going, and that's certainly going to be a factor on the second half profitability in the GP as well.

The next chart talks about China, and you can see again, we had a very strong 2018 in China. It started turning down. The first half of last year was down 20-plus percent. And we felt we were coming out of that, with some ups and downs. But then as you can see, again, Q2 changed substantially.

At the bottom, you see January was down 43%. That was largely a factor of the Chinese New Year timing versus last year. February, which normally would have been stronger, turned into effectively an extended Chinese New Year by a matter of weeks, in some cases, for some operations. So we also had a very significant downturn. March was a bit better, down 19%. April continues to improve, it's in the 10%, 15% kind of a dynamic right now. And as you can see, we do expect at this point to be -- to steadily return again through May, June and then up above, you can see in Q3 and Q4. And certainly, under ideal conditions, if you will, or under the right conditions, perhaps even turning positive in the fourth quarter.

Down below on the left, there's a number of project investments going on right now across the provinces. You can see around $1 billion in total or close to that, many projects. A lot of these affect buildings. A lot of these affect bus and rail, where we have air-conditioning and refrigeration. So we see this as a proxy. The channel partners we have in China have strong visibility on projects. The key thing is going to be the execution of them. Everybody is tight on cash right now. So nobody wants to release orders until they're getting paid by their customers, and our channel is in that same condition as well.

So again, the -- China right now is playing out in this way. And just as Lal mentioned, certainly, as we came out of the Chinese New Year, we had some challenges in the initial days, I'll say, but really, by and large, we're back to running very normally in China and as are our customers and suppliers. And so we're hopeful that this is going to play out.

We've got a couple of charts here on Emerson's supporting the fight against COVID-19. Chart 39 from the Commercial, Residential standpoint, certainly, one of the things we've done is to help out, particularly the first responders, the medical organizations, other care facilities. We typically have a number of safety things in our plants, gloves, masks, goggles and things like that. And frankly, we've done a lot of work to give away a lot of these things initially, particularly N95 and KN95 masks, which are basically the Chinese standard of the N95 masks. We've given away nearly 40,000 of these to many different care facilities around the U.S. and other countries as far as gloves and other things, too. We are providing our own employees with surgical masks, cloth masks and other things. From a prioritization standpoint, we're basically saying that the medical community needs the N95s more than us.

And then from our product standpoint, a number of good examples. On the right, our Cargo Solutions business, that device that you see keeps the temperature tracking. And it also transmits cellular, so it can transmit the conditions in a shipment. A customer was trying to move some COVID test kit materials from Korea into the U.S. The first time they did this, they were all destroyed during a layover due to freezing. And so they contacted us on a Sunday for a Monday shipment. We gave -- got some devices to them and helps to preserve the product as it came across to the U.S.

In the bottom left, the Cold Chain business, Thermo Fisher, an important customer of ours, needs refrigeration for some of their COVID test stations, some of the testing environment, and we're able to supply a number of those quickly. We've got a number of other examples, pop-up medical facilities for air-conditioning and other things.

The bottom right shows in our professional tools business, the Corps of Engineers in the U.S., pop-up care facilities in Denver and Miami. And we provided a lot of equipment for them to be able to get that infrastructure established.

So again, it really plays to the importance of Emerson and our products as essential businesses for society. And again, it's something that we help -- helps our employees understand why it is that we do need them coming to work every day because we've got a lot of important things we have to make sure we're providing to customers.

So I'll turn it over to Lal.

Thanks, Bob. I want to share a few examples from an Automation Solutions perspective as well and 4 specific examples of the efforts our teams are making to support the COVID-19 crisis response.

Starting in drug development, I've already mentioned a major pharmaceutical bio firm announced a significant expansion recently. This is in response to a positive response of one of their drugs in COVID-19 treatment. I can't mention the name of the firm or the drug as we are in an NDA. However, this contract is north of $20 million and will be booked and shipped this fiscal year.

In the testing realm, our Coriolis meters are being used for the precise filling of reagents and testing equipment. If we move over to medical PP&E (sic) [medical PPE], we have been awarded orders from Honeywell in the -- over the past 5 weeks for Ultrasonic Welders to be used in the manufacturing of medical masks.

And lastly, in patient therapy, we've received nearly $20 million of orders for valves, manifolds, to be used in oxygen therapy machines and sanitary regulator solutions for ventilator applications. So a very broad set of offerings that support the response that's occurring around the world. Thank you.

Thank you. Thank you very much, Lal. And thanks, everybody. Again, we made the decision as we listen to our investors in the calls and the sell-side analysts and also the buy-side, investors, that we felt that we needed to go a little bit above and beyond normal in our communication. Don't expect this type of detail all the time. A lot of work goes into this, I just want you to make sure. But I think it's important that our investors understand what we're living in day in and day out.

And again, I want to thank everybody, both in this room, the entire OCE, the 15, 20 people that put up with me for the last 45 days and also the people around the world as both Bob and Lal and Mike and Frank have communicated. It takes a team effort, and we've divided and conquered and formed task force and worked this on a day-to-day, face-to-face basis, and I want to make sure that everyone's recognized for that. I'm doing a video again this afternoon, 2:00, 2 videos, one for the employees and then also one for our website to thank everybody.

I also want to make one special emphasis on this. People know me quite well. In 2015, '16, 17, we went through a major repositioning effort, and I made a very strong statement that we would not cut our dividend. We would not break our dividend history. I want to make sure people understand that. I'm still the CEO. I'm not dead though people have tried to kill me. I'm still quite strongly in charge. And as long as I'm here, our dividend will not be cut, and we will maintain our dividend payments in history. We have the financial flexibility and capabilities to do that going forward.

We also are looking clearly -- one of the things I want to make a comment on is acquisitions. We clearly see some opportunities that will start emerging. And we want to make sure we are strong, financially set. And while the work that Frank's doing and the work everyone's doing right now gives us that flexibility to pick up unique opportunities like we did V&C many years ago.

But with that, I want to thank everybody in the situation room here. And I want to thank everybody around the world that has listened to us for Emerson. And now we're going to open the lines and take Q&A.

And we'll start. So off the bat, so announcer, since you wouldn't do live from Saturday Night Live, this is live from St. Louis. And the first question is coming from, I guess, Mike Halloran. So let's open the line, so Mike can ask the question.

First question comes from Mike Halloran from Baird.

So first question, just some historical context on how you're looking at the oil and gas cycle here. Obviously, you've been few through -- through a few of these days. I can certainly appreciate the slide that Lal put together on the amount of KOB 3 that's now in the portfolio. But how do you think about puts and takes, structural concerns as you move forward, gas versus liquid? And how quickly you think your customers can start responding by putting more capital dollars and OpEx dollars back into the market.

Yes. So I -- Michael, to give you some context, I've been around for quite a long time. I ran the process business back in 1996 and '97 when we had the financial crisis of Asia, and the price of oil went below $10, almost went to $0. I think you're exactly right. We're going to see -- I'll let Lal answer a couple of things here, too. But we'll see a structural change. I think we'll see an acceleration over time from liquids to gas. I think you're going to see a structural change in the power industry, a topic -- what's going to be going -- used in the power industry to generate energy and electricity. I think they'll take their time with this situation. I think some of our gas projects are still on the table. I'll let Lal talk about Golden Pass plus the one going on in the Middle East right now.

But the first thing right now, Mike, is they're going to hunker down and protect cash. They're going to try and maintain the current liquid production, the -- for revenue. They're going to -- so therefore, they're going to have to spend KOB 3 type of dollars and a little bit of KOB 2 dollars. I think this thing -- transition will be more out there in the '23, '24 and '25 time period based on my historical knowledge of this, and I appreciate that.

And by the way, I'm assuming COVID can't go over the wires and you get me sick. Because if you get me sick, I'll be very upset with you, Mike, especially since you're a Brewers fan, Milwaukee Brewers fan.

So Lal, anything you want to add to that?

Yes. Thanks, David. Well, we've seen recent announcements by the majors cutting CapEx down 22% versus '19, those kinds of ranges. It is important to note that here in North America, it's a heavily concentrated space. Approximately 50 players generate 80% of the oil production in the United States. The other 20% is done by thousands of players. I think the 80 players will be -- the 50 players, excuse me, will be very disciplined. As we go through this, the thousands, many of them will be in trouble as we go through it.

So typically, when I think about the 2 segments, the downstream refining and the upstream oil and gas, I believe they have different economic cycles. However, in this, both are grappling without fundamental lack of demand, Mike, as you pointed out. Refiners are facing difficult decisions. They're reducing utilization rates, as I pointed out, some are idling units, and some are trying to figure out how to just maintenance and turnaround intervals to manage this tough environment.

For us, upstream is significantly more weighted to CapEx historically, and refining has been more weighted to OpEx. That's one aspect where we see some difference. The other aspect is that we believe that the refining segment will rebound a little quicker as demand normalizes. However, oil -- the oil production is more structurally impacted, I believe, and that will be significantly more challenging because of this oversupply element that we have. So that's how we see it right now in the 2. But I think structurally, upstream oil production will be a more challenging cycle here.

One of the things we're doing, Mike, in the -- because you're exactly right, there's going to be some structural changes here. We're starting -- we're evaluating our organization, too, and we're putting investments [and how we are going to support it]. As you well know, we can adjust our people but we're working very quickly because, clearly, there's not going to be any major projects for a while in the liquids side, they'll be more on the gas side. And we're -- and obviously, we're going to redirect our people and support the aftermarket business. So a lot of adjusting going on by the world area people. Jamie out in Asia Pacific, Vidya in the Middle East. We have, obviously, Roel in Europe, our leaders there are all adjusting because of the same issue that you bring up. And it's going to be very fluid and live for -- I think, for 2 or 3 years.

And David, to your point around gas, you're absolutely right. Golden Pass continues to move forward. That's an LNG job. Saudi's Marjan project is the offshore gas production, continues to move forward, and we continue to book the awards there. So I think they're looking long-term gas opportunity still as a dynamic they want to continue to fund.

Mike, one more question [from you], please?

Yes. So that's actually a good segue. Then how do you think about the structural changes that you're seeing on that piece and what that means for the AS segment over time? Hybrid discrete, some of these medical life science type of applications seem to be doing very well and certainly a better tail as we look forward. You basically -- you -- particularly, as you bring some stuff back, and some more regionalization come on that side, how quickly can you morph the portfolio? What does it look like? Obviously, you don't stop supporting the KOB 3 piece, and you still have a lot of breadth and depth there. But how quickly can you move? And what do you think about inorganically versus organically?

Yes. I think that we are -- one of the things that Lal and his team are really in -- they're -- we're obviously looking at our internal investments. I'll answer first and let Lal answer this, too. But we're obviously changing our investments towards serving the -- more the discrete marketplace, the other marketplaces, not the liquids side because I think the gas investments will continue to come back. The aftermarket gas is very, very strong. And there will be a liquid, but it will be changed, as you're saying. So you're going to see that we continue to invest at higher levels around the areas that are in the hybrid space, the discrete space, other space, both from an acquisition standpoint and also this internal development. We have a lot of projects underway right now working clearly within the discrete space, within the systems space, that move outside the oil in that marketplace. We're also looking at potentially some acquisitions. Can we shake out some acquisitions that are little more software-based or along those lines?

So Mike, I think you're right. And obviously, as we've seen in every other structure time like this, our liquid business will be less and our other business will be higher. So that percentage will continue to drop.

So if you think about the revenues and you think about the business that we have today, it's going to continue to shift away from the liquid side. We are not going to walk away from these important customers that we support in the oil and gas area. These are very important customers. The industry is dependent on our technologies. But you're right, we will reallocate some of the new innovation around the other areas in our portfolio, continue that mixing away from the oil and gas.

So anything else you want to add there, Lal?

Yes, 2 things, David. We have made significant efforts, both organically and inorganically in developing our portfolio around the discrete space, both with acquisitions in Europe and internal investments in that business around our core ASCO technology, and there's a significantly longer runway to continue to drive that. The 2 other areas, David, that I'm particularly focused on from a diversification perspective are in the hybrid segment, life science, particularly, as we touched on, Mike, and the power segment. I think there are opportunities to expand our power market beyond our traditional generation control system into other areas.

Yes. I think that on what you -- also, Mike, to add on, he's -- up in Minneapolis right now, they're working on a lot of sensors for the hybrid life sciences, food and beverage space, which is an important area.

Next question comes from Nicole DeBlase from Deutsche Bank.

So I just wanted to ask about margins in the second half of the year. Looks like you guys are embedding decrementals getting about worse in the third quarter despite the fact that I would suspect restructuring payback is stepping up. So if you could speak to decremental margins as well as the expectation for restructuring payback.

Yes. I think the big issue right now, Nicole, is in the second quarter, why our decremental margins were so much better is, obviously, we had a lot under -- done in the first quarter. And then the drop-off in the sales is significant, but not the same level we're talking about in the third quarter.

So right now, the acceleration of the decline of our sales are overwhelming basically the restructuring we've done in the first half and the new -- and the incremental restructuring we have going on at this point in time. We are still looking at 12 months or less on the total pot. We are also looking at some longer-term ones that we're doing relative to our international markets, so we can sort of set ourselves up for a better '21 and '22.

But the third quarter in particular is really -- is because the drop-off you see in those sales, I think -- what did we drop off, $1 billion something in the third quarter sales?

$700 million.

$700 million? It's just overwhelmed everything we've done at this point of time. So we've been a little bit more cautious on that. But we're still looking at a very good payback of 12 months from that standpoint, very focused on that. But I just don't see us overwhelming that drop-off in sales that's hit us so hard in April, May and June.

Okay. Fair. That makes sense. And then just piggybacking on to that question. Is there any big difference in the margin expectation by segment? Or will both face similar decrementals in the second half? Just thinking about the fact that most of the restructuring spend has been focused on AS?

Bob, why don't you answer first? What's your decremental in second half? You're going to be close to 30...

Yes. We're going to deleverage at around 30% order of magnitude. That's with sales down well into the teens. So there's a pretty -- there's a bit of a sales difference in the second half between the 2 platforms. But as Dave mentioned, that magnitude of sales decline, even with a very strong SG&A reduction versus last year and certainly many activities in the plants, the operate -- the deleverage of volume as well as, again, the COVID-19 impact, which is very disruptive to the plants right now, is going to be very challenging.

From a productivity -- I think the only thing you want -- might want to add to that, Bob, is you're still trying to target some EBITDA margin improvement for the whole year even with the down sales you're looking at. Is that still the case?

Adjusted EBITDA in total for the whole year, we're looking to hold versus last year. But it's going...

It's harder doing that...

But it's going to be hard at this point. Yes, that's going to be very strong with the volume decline, but it's going to be difficult to, at this point, be up.

Yes. The big issue -- and I'll let Lal answer, too, Nicole. The big issue right now is the plant. Some plants will operate for a day, 2 days and then get shut down as we have to clean. And that's -- that productivity impact is very, very hard to overcome, in which -- safety within our facilities is very, very important. It's frustrating. You have a situation, all of a sudden, you have to shut down, then you got to get people back up. So it's another hand tied behind your back here. But overall, I think with all that situation, it's going pretty well.

So Lal, anything you want to add?

Yes. Thanks, David. Nicole, the third quarter is clearly our most challenging quarter with deleverage rates in the 44% range for us. That's driven by predominantly 2 factors: one being the North America impact, which is most significant in the third quarter accelerates from March into Q3; and the book-to-ship businesses impact. So the short-cycle businesses in our instrumentation and KOB 3 and Final Control being impacted, those are higher-margin businesses than some of the longer-cycle businesses that we do have.

Correct.

Things do get better for us sequentially into Q4 from a deleverage perspective, and we fall back into the 20s on a pure EBIT basis, which is more normalized. But the third, we take a significant hit, Nicole.

The next question comes from Andrew Obin from Bank of America.

Just a simple question. Looking at the comparison you guys making with '08, '09, and I understand the bottoms-up fact that the company is better. But it seems that the GDP forecasts for 2020 are going to be weaker than what we even saw in the great financial crisis, yet your revenue performance seems to be better than in the financial crisis. Is that all driven by just changes in the portfolio? Or are there other assumptions from a macro perspective embedded there as well?

The number one issue, Andrew, is we went into the financial crisis running hot, strong. We are very strong. We are growing double digit. So that was the big issue. We were in on a growing curve, and then we got hit, and we dropped hard off that hit. As you well know, we were structured this year for basically a flat year. We had a couple -- last year for Bob's business, he was flat or slightly down; Lal was way off what he thought it was originally. So we're going into the cycle differently. And the second thing is we are differently structured from a mix of the business since the last cycle. But the big issue is when we went into that one, we were growing very strongly, and then the bottom fell out. This one, we were ready for it. The bottom had already sort of collapsed last year. That's the biggest difference, Andrew.

And just the second question, in terms of restructuring, you are talking about spending more money, but can you just talk in terms of logistically, what is it you're doing in 2020 now that a couple of months ago, you didn't think you would have to or you couldn't do it? Are there opportunities to move faster? Or is it just you being more aggressive on footprint? And if you could just give us more detail as to specifically [where], if you could share that publicly.

Yes. So there's 2 avenues here. One, we are -- what we're trying to do is accelerate the programs, sort of the fixed cost programs, the facility programs that we had built more into 2021. We're trying to accelerate those into the second half of 2020 so we can get those done sooner because I -- when the spike does come back, we want to have those new facilities up and running, lower cost structure.

Secondly, we are being a little bit more aggressive on some of these consolidations and how we do them and how fast we get them done from that perspective.

And the third thing is, as I said earlier, both at corporate and the 2 platforms, we're looking at the structure of the overall company and what layers we can take out and what layers we don't necessarily need anymore as we learn how to run the company in a different world, which we are right now. So those are things we're doing. And we're just looking at everything very carefully and sort of if we don't need it, we're not going to do it. And that's from that perspective.

So that's what's going on, a lot different view of this as we go through this pandemic war. Anything you -- Lal, you want to add?

Yes. Thanks, David. Obviously, on the facility rationalization, it is dependent on us building the best cost sites, so that we can execute some of those plans. They are underway, but obviously, building plants takes time, accelerating as best we can.

So to David's point, a lot of what we've identified, Andrew, incrementally has been purely around volume-related headcount, decisions on what we do and don't do and then identifying further delayering opportunities across the businesses. Those are the -- those 2 categories, as we talked about in New York, Andrew, are the quickest payback on restructuring and quickest to execute. And that's what we're leaning on very hard here in 2020 as we accelerate the second half restructuring.

Bob, anything you want to add?

Well, I'd just say that our peak plan did not have things like wage freezes and cuts. Certainly, discretionary, I think most everybody else is doing the same thing is practically nonexistent. And frankly, we're just going into the organization at a level -- part of it's volume-related, but a lot of SG&A isn't necessarily easier to do with volume. So we're just making some tough choices right now on positions that we hope to at least be able to work -- have without for at least a year or so to get the payback on it. But some of the stuff, when we do get volume, will certainly come back. And it's -- I wouldn't say it's really part of the peak plan, it's part of dealing with just a very dramatic sales cycle that we hope doesn't last too long.

But again, the operational side, the plants, and that's all going, there's not a whole lot more we can do that will affect the second half of this year. Although I will say, even in the manufacturing, [salary ranks] and costs, we're not -- we're turning over every stone right now and trying to deal with a pretty dramatic volume slide here quickly.

Just a question, have you [changed] your definition of what low-cost facilities are in this environment, given this fracturing of global supply chains that people talk about?

We don't -- we use the word best cost. And the answer is no. We've always -- we always look at valuation relative to logistics. If you think about our regional strategy, we think about logistics, supply chains. I think there fundamentally will be some changes as people look at rebalancing that matrix site that we use. And we did a rebalancing about 5 or 6 years ago, 7 years ago. We'll take a look at that as we go forward here.

But from our perspective, we're -- we tweak that matrix on a constant basis. We'll tweak it again at the end of 2020. But right now, the definition of best cost has not changed, no.

The next question comes from Julian Mitchell from Barclays.

Maybe just a first question, David, looking at Slide 24, and you've got that scenario of the big dip in fiscal Q3 and then staggering back towards a sort of flattish line a year out. Maybe just help us understand within each of the 2 main segments, which end markets you think will lead that recovery and which ones might be laggards? Understand that maybe upstream CapEx is definitely a laggard that Lal had called out, but maybe any other color across the 2 platforms of the slope of end market trajectory.

Yes. I think if you -- I'll comment, and I'll let both these guys comment on their specific business because it will be different. I mean clearly, the liquid side of Lal's business is going to be very slow. I think you're going to see, starting in the first half of next year, some companies look at bringing some facilities back in the United States. So there will be some spending around pharmaceutical and medical, there will be spending around some of the chemical side and the materials that go into that space. I think you're going to see -- the only laggard we see probably early on will be the liquids side on the new contract -- in the new business. Historically, I mean, that would lag with this type of shock.

I would also, probably, be cautious about the gas. I think the gas capital investments will probably be a little bit slow recovering back. But the rest of the 80% of business that we look at, I think, will start bouncing back pretty quickly as they go through their own matrix and see where they're making stuff and how they rebalance that. But the power industry, I think, will continue to spend as it is right now. If I look at the food and beverage, I look at the chemical, all these guys are reevaluating those -- their spending. So I think those are -- they're going to come back. And it is the liquids and the gas side that I would worry about, which is about 20% of the total business.

Anything else you want to add to that, Lal?

Yes, David, just very quickly. Obviously, you know 60% KOB 3 business, Julian, that's a lot of day-to-day small orders. Essentially, what that 60% defines is what is required from an automation perspective to keep the plant running, be it a pharmaceutical plant, a refinery or a coal-powered fire station (sic) [coal-fired power station]. So it's that, that we're focused on. I agree with David that as this comes back, it will be predominantly on that -- it will be -- not be in the production side that will lag, it will be more downstream as we see it. But we're currently already scheduling STO, shutdown, turnaround activity into the fall season. That's across the broad scale of our process industries and power. That we'll see accelerate and return very quickly as people are allowed back on site, and we should see the benefit of that.

But you're going to see a lot of the -- as the White House, and I'm sure every government around the world is looking at is, all the areas that went into the health care, the medical, the type of chemicals, whatever they need, the pharmaceutical, I guarantee you they're going to look at how do you -- around the world, not just the U.S., but also Europe and Asia, they're going to look at, okay, where do we need to make those investments? And that's what's going to help drive a company like Emerson back in the early '21 time period.

Bob, anything you want -- do you see a change coming back?

Yes. Certainly, for us. Certainly, key leading in was obviously China, and that's also, we anticipate, being a key as far as coming out of it as they work on stimulating the economy. Construction, both in terms of real activity, if you will, but also especially the channel just getting very cautious about carrying inventory snaps very quickly on us. And depending on the sell-through picture, that can come back quickly as well.

Cold Chain right now, again, the restaurant industry is largely frozen in the United States or on hiatus. Even supermarkets, which we're all realizing are critical infrastructure, are very limiting as far as who they want in the sites. So they're very careful about doing any project activity right now.

And then again, certainly, just a general customer, both individuals as well as companies, freezing right now with uncertainty about what's going to happen. And then, again, coming out to China. And certainly, again, for us, the summer cycle in the U.S. with air-conditioning is going to be quite important. And that we always watch as the spring develops and as the heat develops, that's going to be a key factor.

Yes, it might be more of a replacement market this year than a...

Yes. Yes, there's certainly talk about replacement, but about 85% of our business is oriented at replacement anyway. So certainly, the housing -- new housing will have some factor. And whether people do repairs or a system replacement matters a bit, too, although our margins on the repair side, the compressors are quite good. So there's certainly some mix help if it gets down into component repairs.

Thank you. Julian, anything else?

Just a quick one. I mean I know that you always look sort of further out into the medium term. So maybe whenever we come out of this downturn, would you expect anything different about the incremental margins whenever we come out of this slump versus, say, your experience in 2017 or 2010 and '11?

Well, if we -- I mean from the standpoint of -- we're not backing off our peak margin plan. So obviously, as we come out of that, incremental margins should be better in the term because we're taking fundamental structural changes to the company, and we are evaluating all the touch points between the 2 businesses and the corporate entities. So I would say structurally, costs will be lower as we come out of this, and that will be a good thing. And the key issue is -- for the next CEO is to make sure that he or she does not allow those structural costs to come back in. But I would say as we fly out of this thing, incremental margins should be better for us.

Next question comes from Andy Kaplowitz from Citigroup.

Let me ask you about China just in the context of, obviously, down 20% in AS in Q2 and 30% in C&RS. So how much did you use China as a road map for COVID-related impacts across the rest of the company when you're thinking about your guidance? Because you don't seem to be guiding to that kind of impact for the rest of the world in the second half. Is that mostly because of the expected China recovery? Or are there any other geographies that are hanging in there better than China? And then can you give us your take on the shape of China's recovery? I know you gave us a lot of color. Do you think it's ultimately U, L? What do you think there, Dave?

China recovery is going to be more of a V shape. And you can just quickly see, I think it's going to be sharper for Lal, a little bit more flattened for Bob. And the reason for it is Lal's businesses -- I mean from a nationalistic approach, China is investing in things that will help them as a country, be it the medical area, be it the power area, be it the other different energy areas, given the fact they're building tank farms to buy $10 price of oil.

I mean China is -- for Lal's business is going to staff much faster. Now I don't think the rest of the world, if you just -- I'll talk Lal's business first. I don't think the rest of this world will snap this way. China had a little bit different agenda from the standpoint of how they control the economy. I think the other economies will have a slower comeback from the standpoint of how they open up.

We just look at our measured opening that we're going to have inside the United States. I see the same thing happened in the middle of Asia -- in the Middle East, not Asia, South and Middle East and also in Europe. So I -- what we're mapped out here, Andrew, is a different -- a slower recovery within the markets outside of China. I also see that -- look at Latin America. I think Latin America is going to struggle under political leadership and also the financial wherewithal is not that good.

Now on Bob's business, clearly, historically, Bob's business, he's coming back quite strongly in Asia -- or China and Asia, not snapping as Lal's because money is being more allocated to where they want to put the money but still can be a pretty strong recovery. And I don't -- we don't see that type of recovery in the other markets. So we see more of a flattened slow recovery.

Now the one thing that Bob has historically is he has snapped, as he has a chart, he shows historically, maybe by the third or fourth quarter of next year, he could see things accelerate. And it goes back to the distribution channel, which are liquidating because of the financial wherewithal of that channel. And then also, they see some strengthening, they can staff. He actually historically has a stronger snap. And so we've not factored in any snaps other than in China because it's just -- I don't see the other markets behaving like China at this point in time, Andrew.

If I could add, Dave. China has definitely been very proactive about getting businesses, getting the economy back going, which is not necessarily the case you see in other countries, and both in terms of getting plants operational, getting people back to work and also then on the stimulus side of injecting things with programs. So I think you're just seeing a lot more organized collective effort, if you will, to get the economy back running that we're going to see in a number of countries right now.

Lal, do you want to add anything?

Yes, just very quickly. Obviously, China doesn't have the production element of our marketplace. Europe is the other area that has very little production left, and [RC] has been depressed for a long time. And we're seeing Europe being more resilient than the Americas, for example, as well. So those will be 2 nuances on that.

That's helpful, guys. And then, Dave, there's been a lot of talk. I mean you mentioned about reshoring and how that might impact big, multinational companies. You did talk about your strong local-for-local strategy. So maybe talk about how your supply chain has been impacted, a little more color there, and how you might benefit if, in fact, we do see more emphasis on localization of supply chains? And then conversely, how much concern do you have about being a big industrial player in China if we do have more call for nationalism over the next couple of years?

Well, nationalism has been calling on now, it started back about 5 or 6 years ago. So that's nothing new. It's obviously just escalated a little bit higher, but it's been going on for some time. I firmly believe based on what we're seeing in our customer base in both the chemical industry, what we see in, obviously, the food and beverage, the hybrid, the medical industries, we're seeing a push to try to rebalance some of these -- the supply chains and also where they make stuff.

The fact that Honeywell is opening a mask plant in Rhode Island, a mask plant in Arizona, the fact that we're seeing some first vaccine production that we're working on right now and going after is going to be in the United States. I think legislation has to be changed to protect the medical and pharmaceutical industry and the vaccine industry. But I think you're going to see that.

I think clearly, the negative side of that will be companies like Emerson or the multinationals that we serve, the global industries, we're going to have to work that issue. But it's not going to just be in the U.S. I think Western Europe will be the same way, Andrew. I think you're going to see Western Europe, be it the French, the German, the Italians, the Spanish, the Belgians, they're going to look at what happened and what they could depend on, be it the Asians or be it Americans. And they're going to say, "Okay. We need to redo some stuff here."

So I think this is going to happen globally over the next 2 or 3 years. And I think the good, solid global industrial companies, which you guys all know about and you -- many of you follow, I think, will benefit from this. I think the guys are -- the companies are still going through massive changes, are going to -- struggling, but I -- there's going to be pluses and minuses. In the end, I think I'd put a plus on our side. I do have a couple of negatives, as you point out, and we'll have to manage those accordingly.

Next call comes from Josh Pokrzywinski from Morgan Stanley.

So we've talked a lot about the supply chain. Anything -- in this whole onshoring dynamic, anything in your own supply chain, your own sourcing that you're looking at and saying, "Gosh, this has gotten too long and as much as we manufacture locally, we're having to cross a few too much -- few too many borders to get components or other kind of subassemblies," looking less at your customers and kind of more at yourself as the purchaser.

Yes. The answer is yes. And so what is -- what we're going through right now is the first wave we, obviously, hit was the China wave. And as we looked at the China impact at the end of January and early February, we're looking, obviously, what's happening to us right now as we look at the India, Malaysia, Mexico, U.S., what we have is a very good enterprise risk strategy driven by the businesses, and so evaluated through our audit side and through the Audit Committee. Under Lisa Flavin and the Audit Committee, we will go through this process most likely. I asked the Audit Committee yesterday to -- we're going to wait a little longer, probably be more like August this year. I want things to stabilize, but we're going to look at things like how did our supply network do from a financial crisis standpoint? Do they have the money? Did we have to help them? Which ones were able to keep up with us as we ramped up and down?

So I think that from -- as we look at it right now, Josh, we're not going to make any fundamental changes. We -- as you know, our strategy is we have multiple suppliers, but the big issue for the first time we're seeing not just 1 or 2 countries closing down, we have 3 countries closing down. And so what we're going to have to do here is evaluate this from an economic standpoint and an enterprise risk standpoint is looking at this model now and say, "Okay. Do we have to have 4?" So those are things that we will do. Nothing right now. I mean I'm more interested in stabilizing and then recovering. But we do know what happened to it, and I guarantee there will be changes as we leave this year on a calendar year basis and as we move into 2021 on a calendar year basis.

So I think it's a little too early to react. We've been able to overcome it. And in the meantime, I do know we'll make some changes as we go forward here in '20, late '20 and early '21.

Got it. Appreciate that. And then just as I think about some of your kind of longer-cycle customers or folks who don't make decisions lightly, I would imagine that the speed at which this has happened has made it hard to kind of calibrate what they want to do, just show up one morning and kind of erase the 0 from the budget and go forward. At what point do you think you get clarity from your customers, i.e., they've had enough time to scrub everything and get back to you because I would imagine you're not quite in that moment yet where [they're really firm in] what they want to do?

Josh, this one's a lot faster. And the reason -- this one's a lot faster. I mean is it 100%? No, but it's a lot higher percent than you think. And the reason for it goes back to what Frank covered is the liquidity financial crisis.

So they really had to jump on this thing very early on in February and March. Now will there be some changes? The answer is yes. But I think that you missed -- you don't represent them well then if you don't think that these guys have made some fundamental changes. We're living it daily. Like the OC -- we get together at 2:00 every day, the OC downstairs, the big board room, and we're spread out. And we -- both of us, both Lal and Bob, we're talking from a customer's input. So these guys are moving much faster.

So maybe the last pieces will be finalized as they would finish out this reporting this quarter. But if I look at our customer base from a financial standpoint, they had to take actions very, very quickly, both from internally, cash flow generation, and then also what we're looking at from a financial market standpoint. So this one is a little bit faster pace. And hence, being together allowed us to make some adjustments much faster. But I would say these guys are further down that pipe than you think. And probably this quarter, we'll finalize it.

Bob, anything you want to add on that?

No, I think that's right. And a lot of it is because nobody just -- nobody really knows what to expect. So in that event, they freeze quickly. Whether it's a small customer or a large customer, everybody is freezing very fast.

Yes. So I think -- don't underestimate this. It's happened pretty quickly.

Next question comes from Steve Tusa from JPMorgan.

On slide -- I was going to ask about the sequential downtick from June to July on Slide 34, but I'll leave that -- I'll take that off-line, I'll keep that one. You have a modest sequential downtick there.

Okay. So anyway, we really appreciate all the detail. Most companies are withdrawing guidance, obviously. You guys have given a lot of detail here.

Just a very simple question. How much of these cost saves -- I think you said $46 million of the cost saves have been booked kind of in the first half. How much do you have queued up for the second half? And then how much do you have visibility on for 2021?

So we do have the numbers here, let's work this number and work [it for him]. But we basically -- what we showed the Board last week, Steve, is the second half quarter-by-quarter and then also what we showed them is the first half next year.

So Lal, what do you have queued up for savings built into this at this point of time?

So built into the plan, just to kind of reset, we spent $112 million in the first half. We recognized savings from the restructuring and other activities in the first half of $46 million, okay? Second half restructuring will be $118 million. We combined savings in the year -- excuse me, in the second half of $186 million.

So incrementally, it'd be about $140 million something. And then what are you -- what's your running out -- what did you tell the Board going into the first half of next year? You're going to clearly estimate the...

I did not change off the plan from February. There will be run rate, obviously, impact because of what we're doing incrementally this year.

So the big savings for Lal is going to be in the second half and then will go into the first quarter next year.

Okay. So there will be some carryover into -- so did you pull all of that into this year? Or you still have a pretty decent year-over-year kind of variance heading into '21?

What did you tell the Board spend on '21?

Right. I'll share with you -- well, I did not go into '21 spend, but our spend on '21 is expected to be $83 million.

$83 million.

I have not changed that number.

$83 million. So we've accelerated some stuff in, and therefore, $83 million. You'll have -- they'll still have some savings. I don't know if it's going to be dollar-for-dollar because there's going to be some longer-term ones, but it will still have some carryover. So he'll probably have another $80 million for the whole year next year.

So to give you perspective, David, it was $65 million in '19, it will be $230 million in '20, and then another $83 million in '21.

Yes. You'll get dollar-for-dollar savings over -- pretty quickly on that.

And for Commercial, Residential, for the restructuring programs, we're doing this year, about 60% of the savings benefit we'll capture this year, so we've got carryover about 40%. And then of course, we got a whole another set of actions in '21 for '21 and beyond that will lay into that as well.

So the key is, Steve, I think we'll still have savings coming into the first half of next year, but ones we will have to offset in the first half of the year will be things like the salary cuts because we will institute that. So that -- those numbers will have to come back. That's to the tune of around $6.5 million for second half, so $3.5 million per quarter. The salary planning numbers will hit us all for next year or 2 because that will roll back out. So...

Furloughing. There's a number of things, again, we're doing in the second half to be dramatically, if you will, that -- depending on how the sales curve returns, certainly, some of that spending can return.

Yes. The key thing is trying to bridge as much of the cost right now, and then our real cost savings will flow in as we finish this year. But I like the pace right now. I look at what's going on with the decremental and the inefficient plants and the savings are flowing through pretty nicely.

And why in the back of my mind do I feel like that there was like a $70 million number that you threw out there earlier in the year and said you had embedded some of that? I mean these numbers seem substantially higher than that. I thought a little more is going to be pushed into kind of '21. Or did you just kind of accelerate those?

30 -- yes, we had a 35 number for last year. I think they are bigger numbers now, Steve, because what's happened is we've done a lot more short-term numbers. And I think that the numbers that we shared with you in February are very similar to this. But they're obviously higher now because we have more savings, and we're trying to accelerate.

So the costs are going up, but the savings are going up at the same time. We'll have probably more carryover because we're doing more action right now. I mean the issue is we're living in a period right now that we have to figure out how to drive our cost down, and that's where we are at this point. So the numbers are bigger than I talked about earlier, but it's always hard to tie back to other things I've said over the phone. But then I think you just...

Right. And then just a -- just one quick one. Yes, I just wanted to kind of nail down kind of the quarterly sequencing because you gave the third quarter and the fourth quarter. And the fourth quarter, obviously, is a step up sequentially on an EPS basis. Is that essentially kind of the mechanics of basically revenue stabilization and then all this kind of cost-cutting flowing through that you get? You don't see that in the second quarter because of how hard revenue is going down, but you really see it in kind of the fourth quarter. Just trying to reconcile the $0.60 moving to kind of the $0.80 to $0.90 or whatever it is in the fourth quarter.

100% correct, Steve. I think that -- right now, we started -- I mean the team started working extremely hard about March 10. And we started taking -- okay, guys, we've got something coming at us here. And so what you're seeing right now is this wave is hitting us a lot harder as we saw around the world. So we've taken actions and we fundamentally believe will stabilize by the time we get into June. Business will still be down, but our cost actions are happening, and that allow us -- as the volume stabilizes a little bit in, obviously, a lot lower level, our savings will start flowing through. That's why we have that from stepping up.

The other thing I'd make a comment, you -- I think you well know is that we've always had a variable performance share program going back since early '70s. In the chart that we showed on Chart 8, when we showed the first quarter, we got hit very hard by $0.10 because the stock price is going up, on Chart 8 of the first quarter report in February. This quarter, what's happened is, obviously, with the stock dropping dramatically, a lot of wealth has been locked off of our shareholder base, including people like me and Frank and Bob and Lal. But the variable plan, obviously, is a lot lower cost. So therefore, we've got a benefit this quarter. We're assuming our stock price will stabilize and start coming back up, so we're factoring a little bit of recovery so we'll have a negative number based on right now in the second half of the year. We've always had a variable plan, and we mark to market, as you well know and you've pointed out to me over the times.

The next question comes from Robert McCarthy from Stephens.

I guess I have a question -- so in any event, expanding upon Mr. Tusa's excellent inquiry, as always, the -- I wanted to ask a little bit about the underlying cadence of at least the near term. Obviously, you sit on the -- one of the committees that was just announced, the committee to reopen the economy. I think you're part of the industrial working group. So I don't want to prejudge the recommendations you're making there. And I better be careful because my monthly guy who writes my checks, the gentleman who owns my firm is on that committee as well.

Yes, yes. You well know. Yes, yes.

I wanted to get a sense, in all seriousness, of how we think about the near-term short cycle in North America. How do you think about what is a return to at least economic normalcy, people getting back to work? Obviously, we've heard a lot about kind of a red-blue state divide here. And I don't want to get into a big political discussion, despite my earlier rhetoric. But I do want to get a sense of how you're thinking about the industrial short-cycle plays out in North America. And perhaps Bob can amplify some of those comments. What's embedded in your guidance as we roll it out going forward?

I mean I think that what we see right now is that the business leaders, a lot of political leaders are starting to realize the tax revenue shortfall, the cost of this, of shutting down the economy, is enormous. And they're starting to see -- you're starting to see it here in this town. The medical professionals are having to lay people off and to cut costs because all the businesses disappeared, revenue and other than just the crisis around coronavirus and the same thing in the business world. So I think that we're all fighting to save our lives as the companies and institutions, a lot will not make it. So from my perspective, the push forward is trying to get the economy open and get business open. We can do this safely. We've learned a lot from how this isolation and how we go about this and how we work together, both from a company standpoint and the geopolitical standpoint. I've watched politicians and business leaders, business leaders with business leaders, there's been a lot more collaboration than the press would ever, ever, ever talk about.

And so what I see right now, to be honest, Rob, I think you're going to see the next 2 quarters are going to be pretty tough for America. There's a lot of things that have been stopped and slowed down. There's a lot of concern even in our workforce of coming back to work and being exposed to this because people look at this as like it's a killing zone if you leave your house. And so I think that -- so what we're factoring in the U.S. right now is a very, very weak third and fourth quarter. We're not looking for much recovery here. And I think that we're going to see the recovery happening internationally first. And I think that's what we're starting to see already in the month of April. So I think you're going to see a very gradual get back to work. I think it -- hopefully, we'll start seeing some travel come back in. Thank God we're not in the travel industry. I don't know how they're going to recover here for a while. But this is going to be a very slow recovery. And the money is being put out there, but in reality is, so much wealth and so much economic wealth has been lost that there's not enough money in Washington to flood this world to bring it back. So we've just got to get people back to work, making things and generating, and that's going to take a long time. And that's how we're factoring into. We're not factoring much of an economic impact in North America at all.

What do you see, Bob?

Yes. I mean the U.S. outlook for us in the second half is dramatically more difficult than any other region. The general industrial, the construction environment, as I mentioned, the Cold Chain environment, frankly, we just see all of that being challenged for a while, again, until we have the comfort -- until the job losses ebb and we get the comfort of people getting back to work, which is going to take a little time, probably.

Yes. I mean you look at over 3 -- 30 million unemployed people in the United States, let alone the people [inclining], and let alone the people that are [very] holed up in their homes right now that don't want to come out. So I think this is going to be quite dramatic. It's going to take some time. It's not going to be like the China. I think Europe and those guys will probably fall off sooner, and it's going to be a tough one.

Lal, anything else you want to add?

No.

Okay. Anything else, Rob?

Yes. No, that's very sobering. I guess on top of that, I think you have your President of Safety in attendance, if that's right?

Yes.

And again, I don't want to get into too much policy discussion, but one thing that's been meddlesome for everyone, bureaucracy and policy aside, has been some of the shortages around testing. I guess the question I would have is, as you kind of flex across your facilities and you look at Mike's chart, have you instituted your own kind of captive testing program for Emerson? Or what have you done to make sure that you can create the best information and environment for your workers to go back with some confidence of safety?

The big issue -- I mean the -- everything we can work around, the right equipment, the right spacing, the right environment, the right [cleanses], having -- cleaning your hands before you go into the facility, be clean, everything else, staggering the workforce, heat, temperature. With this virus, a little bit different in temperature. You could have the virus for several days before your temperature starts moving. The big issue that we've all talked to the President about and he knows this from a business standpoint, is we're going to have to have, what I call, quick-testing facilities. We're going to go back assuming -- I mean I'm hearing more and more words. I heard it yesterday out of Washington. They are coming along with quick testing to allow us to have a much faster impact. So if we have someone come sick in the facility, we can test him or her, find out if they are really sick. And if they are sick, isolate them and quickly isolate people around them and then cleanse and then get back to work.

So we're going to be in this game here, I think, for the rest of this year. The vaccine thing, you -- we can't wait for a vaccine. There won't be any business left if we wait for a vaccine. We've got to have the testing ability to find out who's had it, who's got it right now. And I think that's the big push, both in Washington and the medical community because they know from business we need that. We can do everything around that, except that. And so the quicker that we get that and I know they know that, and that's why I heard yesterday, they're ramping up the millions upon millions of that testing, that quick testing. And that's going to -- obviously, we'll benefit from that because that's going to come from the pharmaceutical industry, the drug industry. But in the meantime, Rob, we're going to do everything around that, and we -- that quick testing thing's got to come. It's got to come to give confidence to the workers. In the meantime, we're going to do everything we can to keep things safe. And that's where we are right now.

But we, as a company, I think the number is under 40 people globally have had tested. Lal's on this meeting that meets every morning. 40 people are tested. We've unfortunately had 1 individual, part-time worker in England who passed away, a guy. It was a very unfortunate situation. We've -- our isolation has really dropped off right now. The new cases have really dropped off. But safety is a paramount to what we're doing, and we've got our top, top people on this thing. And they're countering people like me who was -- from my standpoint, you charge forward, you're out there and you're dealing with issues. I mean I'm the type of guy that would lead in World War II, if you got that impression. So that's where we are.

I'm going to take one more question from a sell-side -- or two -- one more sell-side analyst, and then we're going to lock it down.

Next question comes from Joe Ritchie from Goldman Sachs.

So Dave, just -- I guess my first question, when you think about that 14% number organic decline in the third quarter, can you just talk about April specifically? Has that been trending at that number already or below that number? I'm just curious like where you stand today month-to-date or quarter-to-date on -- versus that number.

It's -- our order pattern right now is below negative 15%. So we're tracking below that at this point in time on Bob's business. Lal's business is probably a little bit better than that. Lal has got some backlog. So when we look at that 14%, we go plus or minus 1.5%, most likely it's going to be around 14%, 15%. The key thing that we'll come out with, we will come out with the orders in April and May. We'll get that out for everybody, Joe. But right now, the trend line is dropping quite rapidly. But we're starting to see some stabilization in our international markets, including Europe.

So the key issue, the big wildcard for us right now of substance is the U.S., going back to my comments with Rob. This is still in a free fall. And the question will be is how do we stabilize this from a business standpoint in the near term. So I think that I feel very comfortable even today, as I talked to the Audit Committee yesterday morning, this 14%, 15% negative third quarter is well in tune. And I expect our orders when we come back in, we'll see that our orders are probably around that 14%, 15% in the month of April.

Got it. Okay. And maybe just kind of following on there, and like, I'll echo everybody else's comments. I really appreciate all the rigor and level of detail that you guys went to, to give us as much information as you did today. But just following on, on that last point, Dave. So when you think about then the U.S., as we progress through the year, I mean it's really hard to know exactly how the shape of the recovery is going to be. How much is China, I guess, influencing your thoughts around the U.S. and kind of that improvement in the growth pattern as we head into 4Q and into 2021?

I think that from my perspective, as I said earlier, Joe, it's -- people would like to make that early -- same comparison, it's not going to happen the same way. China is a controlled society. They worked extremely hard. They shut it down hard. It seems somehow the sickness was only in a couple of regions. And they came in structurally. What we learned in China from our facilities, obviously, we're using from a safety standpoint, other facilities around the world. So I think the China structure is completely different. It will help us, obviously. But what we're looking at here is the U.S. is a completely different cycle; and Europe, a completely different cycle. It's in a different world. So we're looking at the U.S. as far more negative, far more muted and much more, I would say, a U-shape type of a structure. It's -- we're going to stay down longer and then gradually come back out of it in the second half of '21.

We do not see a quick snapback at this point in time in the U.S. Now if there's somehow that everyone got back to work right away, we got the testing that we needed, maybe the fourth -- the third calendar quarter, we could start seeing stuff. But I think that's going to be more in the fourth quarter this year. So I'm very negative on the U.S. growth model, and I'll let Lal and Bob talk about this, but that's how we see it right now. We're structuring a completely different cycle for each of the world areas based on historical norms and based on what we're seeing from our customer base right now.

So Lal, over to you...

Yes, I absolutely agree. As I went around the horn with my world area leaders yesterday, it was clearly a North America challenge, significantly more so than anywhere else.

So why don't you give a couple of colors? You got some colors in North America.

Yes. I'll give you...

We'll never give this much information again. You have to rip my tongue out there if we give this much information.

Yes. I've already given you the color around what's happening with quotation rates. RFQ is down in that 25% rate in our -- across our businesses. But just to give you perspective globally, globally, we were booking approximately $850 million a month. That was our run rate as we went through '19 into the first quarter of '20. In [P7], we'll book somewhere around $680 million. So that kind of drop-off is very significant. That's that 15-ish-plus percent...

[P7] for him is April for work on period.

That's April. And the biggest hit in that is the U.S. and Canada. The other world areas, Europe, Asia and Middle East, will exceed their plans, but the Americas particularly, will be challenged therein. So Asia will be very close, honestly, to a normal -- what we call, a normal month in bookings. Surprisingly, the return in Europe doesn't look as bad. But it's really that America impact...

And Europe, we're getting a lot of medical bookings because that's a lot...

A lot of medical, a lot of life science, David, and oil and gas. Honestly, downstream, we won a significant order with BP yesterday in Azerbaijan for a control -- a digital twin control system.

So Joe, it's going to be -- I think it's going to be an international market and so that's what we see right now. I think the companies that are very international will have that benefit.

Bob, you want to add anything to that? Anything, Bob, you want to add?

No. Again, I think -- I mean we don't expect to see the U.S. go down as hard as China did, but we expect to see it stay down longer. So it's going to take a little time. Again, it all depends. If people get back to work, if there's a vaccination, all this kind of thing, second half of next year could be a very exciting second half for us. If it plays out longer, then that could change. But when we've come out of these before, we've had some pretty strong quarters. And again, hopefully, that scenario will build up in this one as well.

Yes. We need the testing and the medical support to happen. And I think that's what business people will tell you.

Well, I want to thank everybody for the calls, and I appreciate everyone calling and listening. I know it's a lot of material, I apologize, but I thought it was important for everyone to have that input. And looking forward, I know Pete will be very busy in the phone in the follow-up here for the day, but I appreciate everyone. And I hope -- hopefully, we'll be able to see everybody.

And unlike the famous doctor that works for Donald Trump, I intend to shake hands and hug people at some point in time before I die. And so I'm a handshaker, and I don't believe that the handshake will disappear. I mean if we're all going to be that worried, you might as well jump the water right now.

But I look forward to seeing everybody, and I look forward to seeing what unfolds here in the coming months. But rest assured, Emerson's at business, Emerson is working, and Emerson is working extremely hard to make sure that we can take advantage and solve everything that needs to be solved here in the coming months. Thank you.

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